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THE UNATTENDED RISKS THAT CAUSED TRANSCANADA TO CANCEL THE CONSTRUCTION OF A GAS PIPELINE

At the end of 2015, the TransCanada company signed a contract with the Federal Electricity Commission (CFE) for the construction of the Tuxpan – Tula gas pipeline. The pipeline would have a length of 287 kilometers and the contract included the concession to operate it for 25 years.

This project was motivated by the need to provide natural gas to power plants in the states of Veracruz, Puebla, Hidalgo and the State of Mexico. In addition to meeting this demand, the construction of this gas pipeline had been a request from businessmen to settle in the region.

In November 2018, the Transportadora de Gas Natural de la Huasteca (subsidiary of TransCanada in Mexico) announced the cancellation of the project, with only 19 kilometers to complete. Until then, the investment amounted to approximately 400 million dollars.

In its statement, the subsidiary said that the cancellation of the project was due to the extensive and expensive requests from social groups and local governments. He stated that these petitions were, in the final analysis, extortion. This means that there were two major areas of opportunity that TransCanada did not address, and that led to risks for their investments: 1) creating good relations with the communities, 2) underestimating the importance of local governments.

To ignore the creation of links with the communities through which the gas pipeline would cross, led to the discontent of the indigenous communities for the work resulting in the filing of an injunction. In order to address this discontent, construction stopped as the Energy Secretariat (SENER) concluded a series of consultations with the indigenous communities to evaluate the options to continue the project. Despite these efforts by SENER, the Third District Civil Court with headquarters in Puebla ordered the suspension of both the consultation and the construction of the gas pipeline.

To mitigate this type of political risk, it is necessary for a company to have a system to cultivate local relations in anticipation of local political activity. Organizations that have a high appetite for risk ( https://riesgospoliticos.com.mx/la-aversion-al-riesgo-de-walt-disney-por-que-ceso-al-director-de-guardianes-de -the-galaxy / ) have greater incentives to take risks, which does not mean that no efforts should be made to mitigate possible crises.

TransCanada should have made a mapping of the risks involved in carrying out a work of such magnitude and crossing through regions with a high density of indigenous population. One of the mechanisms, such as the one carried out by Royal Caribbean ( https://riesgospoliticos.com.mx/las-relaciones-comunitarias-en-la-gestion-de-riesgos-el-caso-royal-caribbean-en- haiti / ), is to establish parallel programs so that the works benefit the local communities and satisfy some of the most important needs of the region. With this, local support to the work is guaranteed.

The second unattended risk was to leave aside the construction of institutional relations with local governments, since the contract was signed between the federation and TransCanada . Local governments took advantage of the vagueness of their jurisdictional limits to modify income laws in their favor, which led to the project budget being affected. Obviously, corporations that work with energy are accustomed to working in regions where the rule of law is not fully respected and this is one of the risks that are most willing to run for the benefits they obtain.

In the case of Mexico, with a medium level of development, organizations can mitigate these risks through transparency mechanisms and working together with national and local bodies that fight corruption. Requesting participation of supervisory entities as a contractual obligation could allow the conditions to carry out works do not change in the course of their construction for the benefit of individuals or local governments.  

At Riesgos Políticos, SC, we can help your company establish effective mechanisms for risk management and crisis management. Contact us at info@riesgospoliticos.com.mx .  

 

Photo by Quinten de Graaf on Unsplash

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